AK Steel Is a Strong Buy

AK Steel (AKS) announced first quarter ended March 31, 2016 net sales of $1.52 billion, down 13.3 percent year-over-year from $1.75 billion during the same period last year.

AK Steel declared first quarter of 2016 adjusted EBITDA of $81.1 million, up 41 percent year-over-year from adjusted EBITDA of $57.5 million in first quarter of 2015.

The key steel manufacturing company reported continued year-over-year decline in its top line primarily due to weaker sales for the quarter coupled with poor steel pricing. However, the company’s bottom line improved significantly year-over-year due to an impressive product mix, a continued focus on minimizing costs, weaker energy and raw material costs, and notable operational enhancements.

Focusing in the right areas

AK Steel is focused on sustaining a solid financial position with robust liquidity and no short-term maturities.

The company’s total liquidity and Pro Forma liquidity positions by the quarter end were recorded at $693 million and $942 million respectively. In addition, AK Steel’s senior secured notes have 4 times asset value coverage with just $150 million of convertible exchangeable notes estimated by 2019, depicting the company’s attractive and controllable debt profile.

The steel major is strategically upgrading its product mix to improve margins through superior value products alteration with the production capacity of coated products in the product mix increased to 50% in first quarter of 2016 from 44% in fourth quarter of 2014. Stainless/electrical and tubular products contribution to the overall product mix increased from 11% and 1% respectively during fourth quarter of 2014 to 14% and 2% respectively in first quarter of 2016. However, hot-rolled product contribution to the product mix declined from 23% in fourth quarter of 2014 to just 13% in first quarter of 2016.

The strong financial position of AK Steel is significantly contributed by implementing a strategy to upgrade its overall product mix to include higher margin products and enhance net margins. Further, the company’s manageable debt profile is a result of its continued cost-minimization efforts which is in line with its ongoing commitment to deliver year-over-year strong profitability while offering attractive shareholder returns.

Improving conditions

The domestic market conditions are improving steadily and although consolidated imports declined from the highest levels with US HRC imports, US CRC imports and US coated imports having declined 54%, 29% and 42% respectively from peak during 2015 and since last year still, remain high. Going forward, pricing dynamics are improving slowly but consistently with strengthening of negotiation position with key customers and solid support provided to index-based agreements. Specifically, spot HRC grew 43% to $520/ton from $364/ton lows in Nov-15 and scrap grew 55% to $257/ton till date from Nov-15.

AK Steel is believed to be a top-tier multi-material dealer with hugely diversified and attractive selection of superior value-added facilities including, radical high-strength steel, advanced value-added coated steel, Chrome stainless steel, Chrome nickel stainless steel and electrical steels. Moving ahead, AK Steel is expected to be a leading supplier to key auto makers in North America with strategic development of lasting customer relationships being supported by difficult qualification standards. Further, there’s significant expansion potential at the key automotive works at Dearborn.

The slow but steadily improving global economic conditions across all the key international markets is estimated to drive notable customer demand for automobiles and thus, increasing steel demand would deliver impressive top line growth for AK Steel while, allowing it to invest strategically in future growth operations and deliver attractive shareholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in AK Steel Holding Corporation considering the company’s notable long-term growth prospects but, currently weaker global commodity demand and pricing recovery. However, AK Steel needs to optimize its debt-burdened balance sheet with significant total debt of $2.34 billion against weaker total cash position of $113.00 million only, restricting the company to continue with its daily operations profitably. The profit margin of -3.35% seems disappointing. Moreover, the PEG ratio of -1.89 appears misguiding and indicate no growth but decline compared to somewhat healthier industry’s growth average of 0.26.